Incentive Effects of Stock and Option Holdings of Target and Acquirer CEOs

ABSTRACT

Acquisitions enable target chief executive officers (CEOs) to remove liquidity restrictions on stock and option holdings and
diminish the illiquidity discount. Acquisitions also enable acquirer CEOs to improve the long‐term value of overvalued holdings.
Examining all firms during 1993 to 2001, we show that CEOs with higher holdings (illiquidity discount) are more likely to
make acquisitions (get acquired). Further, in 250 completed acquisitions, target CEOs with a higher illiquidity discount accept
a lower premium, offer less resistance, and more often leave after acquisition. Similarly, acquirer CEOs with higher holdings
pay a higher premium, expedite the process, and make diversifying acquisitions using stock payment.